Category Archives: IPOs

Breakfast Wrap: Is Egypt on the Cusp of Privatising Electricity? Taxes Take Two

Egypt’s first private-sector electricity station began operations in Alexandria yesterday in a move that appears to rattle, if not, break the mould of the seven state-run energy companies operating the nation’s power stations.

TAQA Arabia, a subsidiary of Citadel Capital, the Egyptian private equity firm, is running the $400 million station, which will have a production capacity of 11 megavolts and will be fuelled by natural gas.

Up until the early 1960s, electricity generation and distribution was practiced by private companies.  But in 1978, after a transition to nationalisation, seven regional electricity distribution companies were established under the supervision of Egyptian Electricity Authority, according to the Ministry of Electricity.

Some of these companies have now been split into two, but fundamentally Egypt’s electricity power supply is state-owned.

The station was acquired by TAQA as part of a Build, Own, Operate, and Transfer (BOOT) financing scheme.

I.e:

BOOT projects are used to fund large-scale public infrastructure without affecting the country’s debt profile. Private developers are allowed to recover their costs of construction through ownership and operation of the plant for a fixed period before handing it over to the state.

Citadel’s project will provide power to a particular company (the state-owned Egyptian Styrenics Production Company, according to Ahram Online), but it could signal a move toward expanding this scheme elsewhere.

Egypt’s gas shortages have caused some of the worst electricity black-outs in recent years.  But with electricity demand growing, could Egypt consider limited privatisation of the electric power sector? 

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Three big announcements were made yesterday by the ministry of finance:

1)  Egypt expects to reach a loan agreement with the IMF by mid-December after talks this month focusing on limiting the budget deficit and a minimum level for its foreign reserves.  Ahram Online reported that the loan amount, initially set at $4.8 billion has been reduced slightly to $4.5 billion.

2)  The cabinet also approved a new 10% tax on major transactions on the Egyptian stock exchange, including initial public offerings (IPOs). The president said in August there would be no new taxes.

3) Finally, the cabinet approved two new tax brackets for high-income individuals. A 22% tax will be levied on individuals with annual incomes between 1 million Egyptian pounds and 10 million pounds, while annual incomes higher than 10 million pounds will be taxed at a rate of 25%.  The new structure looks something like this, according to Ahram Online:

First segment (LE5,000 – LE20,000): 10 per cent

Second segment (LE20,000 – LE40,000): 15 per cent

Third segment (LE40,000 – LE1 million): 20 per cent

Fourth segment (LE1 million – LE10 million): 22 per cent

Fifth segment (LE10 million and up): 25 per cent

The move to implement taxes on corporations and individuals after previous cabinets had failed to do so signals how the current government is forced to impose hard austerity measures that were initially played down.

The decision to levy a capital gains tax comes despite repeated assertions by bourse officials that such a tax would not be “suitable” for the Egyptian market.

Last year, the finance minister at the time, Samir Radwan, proposed a 10% tax on stock dividends in the hopes of offsetting Egypt’s rising budget deficit. But the proposal was quickly rejected by investors and bourse officials and Radwan was removed in a cabinet reshuffle.  How policies change.

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In my latest FT report, I write how escalating disputes between labour unions and employers in north Africa are threatening to derail economic recovery after the uprisings that ousted long-ruling dictators in the region.

Emboldened by the spirit of political change, thousands of workers in Egypt and Tunisia have staged a series of protests and are now in deadlocked talks with companies over demands for a minimum wage.

The piece puts together a series of examples of how the quest for a minimum wage can also be detrimental to a country’s economic fortunes.  But it also shines a light on the lack of conversation between labourers and their employers.

Some of the companies quoted in the report include Kraft Foods, which has commenced legal action against strikers and DP World, which shut down its Ain Sokhna port twice this year.

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As UAE-based Dana Gas restructures its $1 billion sukuk payment, averting a potential seizure of its Egyptian assets, the “region’s debt market barely blinked,” according to this Reuters feature on sukuk, or Islamic bonds.

Not long ago, a billion-dollar payment miss would have triggered a crisis of confidence in the market; now, it is almost ignored.



Breakfast Wrap: Egypt Must Stop Crying Wolf, Hussein Salem’s Seedy World

I was on a conference call with several Arab (some of them Egyptian) economists and analysts based in New York yesterday, and they told what their biggest concern is regarding Egypt’s transition to democracy.

It wasn’t the confusion over writing a constitution, nor the risk of violence from protests. It wasn’t even nationwide subsidies that have bled the country dry for the past few years.

The analysts’ biggest worry was the credibility of news announcements that come out of Egypt almost on a daily basis.  For example, do we believe the government’s statement that they will secure an IMF loan by November when they’ve been repeating this statement for months?

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The Curse of the IPO

Facebook was probably the most-anticipated tech initial public offering since Google went public in 2004.

But it all went sour when shares quickly went downhill and the stock fell well below the initial IPO price.

It’s not just big brand US IPOs that have fallen flat.

The scene hasn’t been much rosier in the Middle East, where chronically illiquid markets have staved off many public offerings.   Axiom Telecom, the Dubai-based mobile phone retailer,  was poised to be the first UAE company to sell shares to the public in more than 18 months in December 2010.   Weeks later, the company pulled out citing lukewarm investor appetite.

Last year the market got a further blow as uprisings rippled across the region creating market volatility and political turmoil.

It meant total funds raised from the Middle East and Africa stood at $929.9m in 2011, a 68.5% decline on 2010, research from Ernst & Young shows.  Unsurprisingly, Saudi Arabia led the way generating almost half of that amount, with $417.8 million raised.    

Ernst & Young research

Now as the political sphere calms some Arab countries are trying the market again.

Firms in the region raised a total of $1.29 billion through five IPOs in the second quarter of 2012, almost three-and-a-half times more than the $374.77 million raised in the second quarter of 2011, according to the Ernst & Young research.

They were by IPO size:

1) Saudi Arabia’s Al Tayyar Travel Group with its $364.65 million listing on the Tadawul

2) Saudi Airlines Catering’s $354.09 million listing on the Tadawul

3) Najran Cement Company’s $226.58 million IPO, also listed on the Saudi stock exchange

4) UAE-based NMC Healthcare which listed on the London Stock Exchange with a $187 million IPO

5) Oman’s Bank Nizwa that raised $158.49 million and is listed on the Muscat Stock Market.  This IPO was a result of the regulatory changes in Oman’s banking sector which has recently approved Islamic banking.

So with the IPO climate looking brighter, a word of warning from JPMorgan’s Klaus H. Hessberger, co-head of capital markets in EMEA

“Corporate governance and political  stability remain key focus points [in the Middle East].  A successful IPO needs to be a sizable  company with a strong story that can  benchmark itself against European peers. 

Most will also take a listing in the US, London or an Asian market to add some quality.” 

With that in mind, it seems anti-climactic that the next planned IPO in the region is  Al Izz Islamic Bank in Oman which will float 40% of its 100 million rial capital.

The only exciting feature is that Aabar Investments, the notoriously media-shy state-owned Abu Dhabi fund with stakes in Glencore, Daimler and UniCredit, is Al Izz’s cornerstone investor.

What that says about Aabar’s venture into Islamic finance is a different story, but surely with a giant like Aabar behind it, Al Izz can’t go wrong?